Financial reform agreement fuels risk taking
By Telis Demos in New York and Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010.
Published: June 25 2010 08:18 | Last updated: June 25 2010 21:24
http://www.ft.com/cms/s/0/a28ea3c0-801d-11df-8b9e-00144feabdc0.html
Friday 21:15 BST. The welcoming of an agreement on US financial reform has, for the moment, relieved ongoing fears that the US and European economies’ recovery is weakening and raised investors’ risk appetite.
Oil, copper and the euro are higher, and the FTSE All-World equity index has pulled up to flat, climbing back after Asian and European markets, focused on headwinds facing the economy recovery, fell sharply.
Some of the risk surrounding US banking shares may be lessened after lawmakers in Washington finalised the sweeping financial regulation bill – though it likely not quite the panacea for global growth that markets would need to stage an extended turnaround.
“It’s an unambiguous positive that there’s going to be some clarity on regulation,” said Doug Cliggott, equity strategist at Credit Suisse. “But I think there’s unfortunately quite a few i’s to dot and t’s to cross once the bill is signed before we have real certainty on things like capital requirements.”
The S&P 500 index in New York is up 0.3 per cent. Financials, which are 2.8 per cent higher, are showing the way. Moody’s is leading the pack, jumping 6.8 per cent after the reform bill softened some of the language on ratings agencies. American Express led the Dow Jones Industrial average, adding 3.9 per cent.
Banks have also appeared to have convinced regulators to ease the Basel III conditions, while Thursday’s sale by Citigroup of a $3.2bn loan portfolio may be taken as a welcome sign that the market for banking assets is functioning pretty well. The FTSE Global Banks index is up 1 per cent.
In addition, bulls have received support from the forecast-busting after-hours earnings report from Oracle, the world’s third-largest software company. This has reminded investors ahead of next month’s second-quarter earnings season that corporate earnings are providing a sturdy foundation for market valuations.
However, traders continue to fret about the health of the US household sector after some badly received earnings reports and forecasts from a number of consumer-facing companies, such as Nike, which was gloomy in its rest-of-the-year outllook. US Treasury bonds, a market that has generally been more bearish than equities, continues to trend lower.
Adding to these concerns was Friday’s final reading of US first-quarter gross domestic product, which showed growth in the world’s biggest economy had been revised down from 3 per cent to 2.7 per cent. Blue-chip shares in the US were especially hard hit, actually dragging the Dow average to a loss on the day, of 0.1 per cent.
☼ Factors to Watch. Traders will also be keeping an eye on any developments emerging from the G20 meeting in Toronto. ☼
● Asia. The region has borne the brunt of Wall Street’s overnight slide, with exporters particularly concerned about the US economy. The FTSE Asia-Pacific index is down 1.5 per cent, badly hurt by a 1.9 per cent slide by Tokyo’s Nikkei 225.
Similar demand worries have hurt commodities and thus the resource-rich Sydney exchange, with a more sober reaction to the prospects for the mining super tax also impacting sentiment. The S&P/ASX 200 in Sydney fell 1.5 per cent.
Hong Kong fell 0.2 per cent and Shanghai lost 0.5 per cent.
● Europe. Banks provided a reasonably perky start to trading, but softness in the resources sector counteracted those gains. The FTSE 100 in London was down 0.8 per cent, yet again held back by a heavy fall in BP shares. The FTSE Eurofirst 300 was lower by 0.5 per cent.
● Forex. The recent dislocation between risk appetite and the currency market continued, in early action, to confound those more used to clearly defined lines of correlation. However, as the day session progressed, the euro’s propensity to strengthen when the mood is expansive returned to colour trading.
The euro is up 0.4 per cent versus the dollar at $1.2381, while sterling has returned to the $1.50 level, rising 0.8 per cent.
Still, the yen closed higher than any point since early March. It has gained every day except one in the past two weeks. On Friday it was up 0.4 per cent to Y89.28 against the US dollar.
● Debt. US 10-year notes have seen demand fade as Wall Street equity futures improve and could not sustain the bounce seen immediately after the release of the US GDP data. However, yields remain close to the 3 per cent level that could spark more talk of “double dip” recession and cause a further flight into so-called “core” sovereign bonds, were it to be breached. Auctions of US debt this week have gone well, lending further support to the complex. Yields are down 3 basis point at 3.10 per cent.
Confirmation that deflation continues to stalk Japan has held Tokyo’s 10-year JGB yield at close to a 7 year low of 1.15 per cent.
Eurozone “peripheral” debt markets are seeing little movement but yields remain at recent highs. Greek 10-year notes are sporting a yield of 10.5 per cent, for example, while credit default swaps are being quoted at 970 basis points, still close to a record.
● Commodities. Metals staged a turnaround, with copper jumping to $3.10 a pound in Nymex trading, a gain of 2.8 per cent. Oil also had a strong gain, rising 3.3 per cent to $79.06 a barrel on worries that a hurricane is forming in the Atlantic. That’s the highest point since May 15 for crude.
Gold is threatening Monday’s intraday nominal high of $1,265 an ounce and is presently up 0.9 per cent at $1,254 an ounce.
Follow Jamie Chisholm’s market comments on Twitter: @JamieAChisholm
Way clear for Wall Street overhaul
ByTom Braithwaite in Washington and Francesco Guerrera and Justin Baer in New York
Copyright The Financial Times Limited 2010
Published: June 25 2010 05:57 | Last updated: June 26 2010 00:36
http://www.ft.com/cms/s/0/ace38f1e-8001-11df-91b4-00144feabdc0.html
The US Congress finalised a major regulatory overhaul of the financial sector on Friday that would impose a $19bn levy on Wall Street, and force banks such as Goldman Sachs and Morgan Stanley to retreat from lucrative businesses.
If approved as expected, the legislation would mark the most dramatic change in financial rules since the 1999 repeal of the Depression-era separation of investment and commercial banking. It would pave the way for President Barack Obamato claim, after the recent healthcare reform, his second key legislative victory.
Banks won important victories, including the right to continue owning hedge funds and private equity arms, into which they can invest up to 3 per cent of core capital. Shares of most large US banks rose sharply.
But the provision could require Goldman, whose successful proprietary investments lifted the bank to record profits, to pull more than $10bn from its in-house funds in coming years. Morgan Stanley may have to pull $3bn from its funds.
Banks won concessions allowing them to continue trading most derivatives, but they will face a one-time $19bn tax to help cover the cost of the bill.
The legislation bans banks from placing trading bets with their own money, a move championed by Paul Volcker, former Federal Reserve chairman. It grants government the power to wind down failing institutions if they threaten the financial system. It also creates a new bureau to oversee consumer financial products.
The new bill must now be approved by the House and Senate next week before Mr Obama can sign it into law.
Top lawmakers agreed the legislation after a 20-hour, all-night negotiation. Blanche Lincoln, Senate agriculture committee chair, agreed to a less onerous version of her plan to make banks spin off swaps desks.
Banks can continue to trade interest rate and foreign exchange derivatives but must spin off riskier products into separately capitalised units.
Tim Geithner, US Treasury secretary, said it gave “crucial momentum” to global financial reform . Mr Obama said: “We are poised to pass the toughest financial reforms since the ones we created in the aftermath of the Great Depression.”
Towards the end of the debate, Barney Frank, chairman of the House financial services committee, announced the bank tax, saying it was legitimate to ask financial institutions to pay the cost of the reform
What they said...
“It’s a great moment. I’m proud to have been here. No one will know until this is actually in place how it works. But we believe we’ve done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done”
Chris Dodd, chairman of the Senate banking committee
“This is going to be a very strong bill, and stronger than almost everybody predicted that it could be and than I, frankly, thought it would be”
Barney Frank, chairman of the House financial services committee
“There are some that want more restrictive language than I do and there are those who want to open up the barn door. I think we have reached a good compromise here”
Blanche Lincoln, chairman of the Senate agriculture committee
“Did they cause the financial instability? No. Are they a part of Wall Street? No. I really think we’re tightening the screws on an industry that has had a desperate two or three years”
Spencer Bachus, Republican Congressman in Alabama, defending the decision to exempt car dealers from oversight by the new consumer agency
Obama calls for bank tax as next step in reform
© Reuters Limited
June 26, 2010
http://www.ft.com/cms/s/0/af94f3b2-810d-11df-9563-00144feabdc0.html
TORONTO, June 26 – US President Barack Obama, fresh from a win on a sweeping overhaul of Wall Street regulations, on Saturday urged Congress to take up his proposal for a $90bn, 10-year tax on banks as the next step in reform.
Mr Obama wants to slap a 0.15 per cent tax on the liabilities of the biggest US financial institutions to recoup the costs to taxpayers of the financial bailout.
“We need to impose a fee on the banks that were the biggest beneficiaries of taxpayer assistance at the height of our financial crisis – so we can recover every dime of taxpayer money,” Mr Obama said in his weekly radio and Internet address.
Mr Obama, who is in Canada to attend gatherings with leaders of the world’s biggest economies, also used the address to welcome a deal by congressional negotiators on a historic rewriting of US financial regulations.
Mr Obama hopes to tout the changes as a model for other countries at the Group of 20 summit on Saturday and Sunday.
“I hope we can build on the progress we made at last year’s G20 summits by coordinating our global financial reform efforts to make sure a crisis like the one from which we are still recovering never happens again,” he said.
The financial regulation package would set up a new financial consumer watchdog, create a protocol for dismantling troubled financial firms and mandate higher bank capital standards, with the aim of avoiding a repeat of the 2007-2009 financial meltdown.
The bill, marking the biggest changes to the financial regulatory structure since the 1930s, still needs final approval from both chambers of Congress.
Mr Obama, who hopes to sign the legislation by July 4, urged Congress to push the bill “over the finish line.”
With congressional elections looming in November, Mr Obama hopes the financial reform and the bank tax idea will resonate with US voters furious over Wall Street risk-taking that led to the financial meltdown and the worst recession in decades.
Some lawmakers have indicated they are receptive to the bank tax proposal but others have questioned whether it is fair to impose the tax on banks that have already repaid money from the Troubled Asset Relief Fund to make up for losses by AIG and General Motors.
Financial companies with more than $50bn in assets and hedge funds with more than $10bn in assets will be hit with the new levy upon enactment and lasting until 2020.
Chinese pay rises spur move to cheaper sites
By Kathrin Hille in Beijing
Copyright The Financial Times Limited 2010.
Published: June 25 2010 23:01 | Last updated: June 25 2010 23:01
http://www.ft.com/cms/s/0/afa6f884-8070-11df-be5a-00144feabdc0.html
After Foxconn’s shock announcement this month that it would more than double base pay for some of its workers, analysts have been pointing out that consumers are unlikely to feel much impact.
“We frequently have double-digit percentage swings in the price of D-Ram [chips] or [LCD] panels, and those are the ones that matter,” says Kevin Chang, analyst at Citigroup. “The impact from the recent labour cost changes is going to be minimal.”
That is because Chinese labour accounts for just over 3 per cent of Foxconn’s total cost of goods sold, and for an even lower percentage of the final retail price of products such as Apple’s iPhone.
But inside China, the labour woes that have shaken the country’s main export manufacturing hub are pushing crucial changes on its economic map, and Foxconn is at the forefront of those adjustments.
“The labour cost increases will be dealt with by increasing productivity, passing on to customers and moving production to inland China,” says Manish Nigam, head of Asian technology research at Credit Suisse. “And the relocation within China will be the most important force.”
The move away from the coastal locations of the Pearl and Yangtze river deltas, still China’s main manufacturing hubs, to other locations is not new.
Some Taiwanese contract manufacturers started diversifying their locations on the mainland as early as a decade ago, and many now have factories in scattered provinces such as Jiangsu, Sichuan, Shandong and Liaoning.
That can make a big difference. In Jiangsu, wages are 86 per cent of the level in Shanghai, according to a research report from Credit Suisse. In Shandong and Shanxi provinces, where Foxconn already has big manufacturing facilities, the wage levels are 82 and 76 per cent, respectively. In Chongqing, the metropolis in central China, wages are 61 per cent of Shanghai levels.
Chongqing is the new frontier for the electronics industry. HP, which announced as early as 2008 that it was building a new manufacturing site there, is expected to start production next year. All its major manufacturing partners have followed.
Foxconn, as well as Quanta Computer and Compal, the world’s largest and second-largest contract manufacturers of laptops, have set up shop in Chongqing. Their moves, in turn, have convinced key component makers to come too.
“In Chongqing, we will soon have the entire ecosystem in place,” says Edmund Ding, spokesman at Hon Hai, Foxconn’s parent. Foxconn produced the first laptop from its Chongqing plant on May 18.
Two years ago, Foxconn already had plants all over the country, but was struggling to convince some customers to migrate away from its most established locations.
“In the most developed locations, people know that there’s plenty of skilled labour available which you can take on board quickly and which allows you to ramp up big orders quickly,” says Mr Ding.
That confidence was absent when technology demand returned after the financial crisis last year.
But now, increased outsourcing by several branded technology companies is adding to the momentum.
Dell told analysts this month that it would outsource as much as 80 per cent of its production this year, up from 43 per cent in 2009. Lenovo plans to increase outsourcing to 55 per cent from 35 per cent last year.
Foxconn, with about 1m employees, has about 35 per cent more people than all its competitors in electronic manufacturing services combined, and has already identified the next frontier. It is in talks with the local government in Zhengzhou to build its next mega-plant there.
In Zhengzhou – the capital of Henan, China’s centrally located and most populous province with close to 100m people – the company can expect not only lower wages but also hopes to negotiate more favourable deals over land and taxes.
Different from other inland provinces, Henan does not have any meaningful electronics manufacturing presence yet. But it has been one of the main sources of migrant labour flowing into the coastal manufacturing hubs.
“If we create a new hub there, people can get employment right at home, meaning they don’t have to leave for Shenzhen any more. This creates a win-win situation,” says one person familiar with the talks.
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